Supply Chain for Mobile Network Operator
MASSACHUSETTS INSTITUTE
FCTECHNO0LOGY
By
Kenneth Lap Chi Liu
FEB 14 2011
LIBRARIES
Bachelor of Applied Science in Computer Engineering (2001)
University of Waterloo, Waterloo, ON, Canada
ARCHNES
Master of Engineering in Electrical Engineering (2003)
Cornell University, Ithaca, NY, USA
Submitted to the System Design and Management Program in Partial Fulfillment of the
Requirement for the Degrees of
Master of Science in Engineering and Management
at the
Massachusetts Institute of Technology
June 2010
@2010 Massachusetts Institute of Technology
All Rights reserved
Signature of Author__
_
Kenneth Liu
System Design and Management Program
I-'
Certified By
David Simchi-Levi
s rSu rvisor
Accepted B'
Patrick Hale
Director
System Design and Management Program
2
I.
Acknowledgement
First I would like to thank Professor David Simchi-Levi for providing the opportunity for me to
do research on this exciting topic. This research project started when I first met Prof. SimchiLevi at the MIT Forum for Supply Chain Innovation Conference in the fall of 2008. Once Prof.
Simchi-Levi found out about my interest in mobile industry, he quickly suggested this
fascinating topic. During the research process Prof. Simchi-Levi provided great support in all
aspects of the project. His guidance is deeply appreciated.
I would like to thank Rob Scanlon for being an excellent research partner. Rob provided
excellent perspectives in every project discussions. Rob isa one of the most responsible and
professional teammate I have had at MIT. Thanks Rob.
I would like to thank DHL for sponsoring this project. The DHL team provided great feedback
and strong guidance along the research process. I learned a great deal from the talent
employees at DHL.
Lastly I would like to thank all the professors and the staffs at SDM. I would like to thank all my
friends and classmates. All of you have contributed to make my experience at MIT
unforgettable. Thank you.
Supply Chain for Mobile Network Operator
By
Kenneth Lap Chi Liu
Submitted to the System Design and Management Program in Partial Fulfillment of the
Requirement for the Degrees of
Master of Science in Engineering and Management
at the
Massachusetts Institute of Technology
1l.
Abstract
The purpose of this study is to understand and get insights on the characteristics of mobile
device supply chain management for mobile networks operators. The relationship between
corporate strategy and supply chain strategy isexamined. The effectiveness of outsourcing is
evaluated. And the areas for effective outsourcing are identified. The study has shown that
MNOs with customer retention as product strategy are likely to be more concerned with
reducing time in their supply chain. However it is unclear that MNOs with generation of
additional revenue as product strategy are likely to be more concerned with reducing cost in
their supply chain. Reducing cost appears to be just as important for MNOs that focus on
customer retention. The study has shown that outsourcing does not guarantee better
corporate performance. It is unclear what the effect is of outsourcing on Profitability, Return on
Investment, or Growth in Market share. The study has shown that areas that are more suitable
for outsourcing include both forward and reverse logistics. MNOs should evaluate where their
strengths are before outsourcing activities to third party providers.
Thesis Supervisor: Professor David Simchi-Levi
Title: Professor of Engineering Systems
Ill.
Table of Contents
.
Acknow ledgeem ent ..................................................................................................................
3
1.
Abstract ...................................................................................................................................
4
l.
Table of Contents....................................................................................................................
5
1.
INTRODUCTION .......................................................................................................................
8
1.1
Objective ..........................................................................................................................
9
1.2
Approach and Thesis Organization .............................................................................
10
2.
INDUSTRY BACKGROUND ..................................................................................................
13
2.1
Mobile device Industry................................................................................................
13
2.2
Mobile Standard.............................................................................................................
15
2.3
Mobile Device Manufacturers.....................................................................................
16
2.3.1
M arket Dynam ics ................................................................................................
16
2.3.2
Player Objectives and Responsibilities ................................................................
17
2.3.3
Player Capabilities...................................................................................................
19
2.3.4
Type of mobile devices .........................................................................................
19
2.3.5
M arket Grow th ....................................................................................................
20
M obile Netw ork Operator..............................................................................................
21
2.4
2.4.1
M arket Dynam ics................................................................................................
21
2.4.2
Evolution of Mobile Netw ork Operators .............................................................
22
2.4.3
Player Objectives and Service Offerings ..............................................................
23
2.4.4
Player Capabilities............................................25
2.4.5
M arket Grow th ....................................................................................................
25
.........................................................................................
26
2.4.6g
5
M obile Device Retailer ................................................................................................
26
MANAGING THE SUPPLY CHAIN FOR MOBILE DEVICES.....................................................
28
3.1
Developm ent Supply Chain .........................................................................................
28
3.2
Fulfillm ent Supply Chain.............................................................................................
28
3.3
M obile Device Supply Chain.........................................................................................
29
2.5
3.
. . ..... 31
3.3.1
Procurem ent ..............................................................................................
3.3.2
Forecasting.....................................................................................
3.3.3
Distribution and Logistics.................................................................................
3.3.4
Sales Managem ent.................................................................................
32
......
.
.. 33
...... .. 34
RESEARCH QUESTIONS AND HYPOTHESES .........................................................................
35
4.1
RQ1: Product Strategy and SCM Strategy ..................................................................
35
4.2
Outsourcing and Overall Perform ance ......................................................................
37
4.3
Most Beneficial Outsourcing Areas.............................................................................
39
.....
40
4.
INDUSTRY SURVEY DESIGN .....................................................................................
5.
5.1
Participant Information ............................................................................
41
5.2
Supply Chain Management Strategy......................................................................
41
5.3
Product Info and Strategy .....................................................................
5.4
Integration ......................................................................
5.5
Distributio n..................................................................................------------..
5.6
Logistics ..................................................................------
5.7
Reverse Logistics ..........................................................
5.8
Corporate Performance .................................................................
5.9
Supply Chain Performance ......................................................................
6.
- ...... 42
.. -----------------------------.................
42
--------............
43
.
- - - - - 44
. --------.....................--
........................
SURVEY RESULT AND ANALYSIS ....................................................................
45
..... 45
46
47
6
7.
6.1
Survey Participation ....................................................................................................
47
6.2
Product Strategy and SCM Strategy ...............................................................................
51
6.3
Outsourcing and Perform ance ....................................................................................
53
6.4
Beneficial Outsourcing Area .......................................................................................
56
Conclusions and Implications............................................................................................
58
7.1
Additional Implications ................................................................................................
59
8.
Appendix 1: M NO Survey ...................................................................................................
60
9.
Bibilography ..........................................................................................................................
72
1.
INTRODUCTION
According to Simchi-Levi, Kaminsky, Simchi-Levil, supply chain management is defined as
"a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and
stores, so that merchandise is produced and distributed at the right quantities, to the right
locations, and at the right time, in order to minimize systemwide costs while satisfying service
level requirement."
This definition explains why supply chain management is such a complicated field. First there
are many stakeholders in supply chain management. The definition mentioned suppliers,
manufacturers, warehouses, stores. These are the major players. In addition there are many
intermediaries such as distributors, logistics providers, transportation providers, ITsystem
providers, security providers. All of these have a stake in the overall supply chain. Each
stakeholder has its own objective, agenda, and goals. Supply chain management is the science
to overcome the differences between the different stakeholders and to integrate the operation
of all these stakeholders in an efficient manner. The task is certainly not easy and there are
plenty examples of supply chain management disaster that shed light on how significant the
problem can be.
To get the right quantities to the right location at the right time while minimizing system wide
cost is also extremely challenging. This is again due to the number of players involved in the
complete supply chain. Each player will try to minimize its own cost. No one has all the
information and therefore no one can see clearly how system wide cost can be minimized.
Although theoretically everyone knows that a system wide minimization will benefit everyone,
but to achieve such minimization requires everyone to work together. However uncertainties
and risks embedded in supply chain operation are preventing system wide minimization to be
run smoothly. The operation of each stakeholder adds different risks to the supply chain. The
manufacturers may have production delay. The retailers may have slow moving inventory. Any
I Simchi-Levi,
Kaminsky, Simchi-Levi, Designing and Managing the Supply Chain: Concepts, Strategies, and Case
Studies, third edition, 2008
of these risks can increase the system wide cost. So not only does everyone have to work
together, they also have to trust each other and have to share information with each other.
This is not easy to do in any industry.
The mobile device has become one of the must-have device in the new century. Mobile device
adaptation steadily climbs as people get addicted to mobility. In developed countries many
people carry 2 to 3 mobile devices with them. It is not unusual to see business executives
display an array of mobile devices at their desk for work (a personal mobile phone, a work
mobile phone, a PDA, a Kindle, an iPod, and iPAD, and multiple laptops). Mobility has become a
necessity and the mobile industry is delivering the products and the services to satisfy people's
demand.
At the center of the mobile industry is the mobile device itself. Technologies have come a long
way to reach its current stage. Users have many varieties of mobile devices to suit their needs.
Technologies evolve continuously to give new experiences to users. The major types of players
in the mobile device industry include device manufacturers (OEM), mobile network operators
(MNO), and retailers. Similar to other industries each of these players has its own objectives
and goals. They are all doing what they can to keep up with the evolving technologies and
changing customers demand. This is a big challenge that the industry is trying to overcome. The
difficulty with mobile device is that it is both a fashion item and a functional item. These
characteristics significant accelerate the rate of change or the clock speed of the industry. To
be successful in such environment it is even more crucial to work with others in the value chain
to minimize cost and to maximize value.
1.1
Objective
The purpose of this thesis is to understand and to get insights on the characteristics of mobile
devices supply chain management for mobile networks operators. At the highest level, the
objective isto investigate how supply chain management strategies affect overall performances
for mobile network operators (MNO). A key question is to find out whether or not there is a
relationship between MNO's product strategy and MNO's supply chain management strategy. If
such relationship exists, how should MNO aligns these strategies? For example in the OEM
study of this research, it was shown that OEMs whose products compete on innovation over
price tend to want a supply chain that is more flexible than efficient.2 This thesis provides the
MNO perspective on the relationship between product strategy and supply chain management
strategy.
Another objective of this thesis is to examine the best practices in supply chain management
for MNO. An extensive survey was designed to cover different aspects of supply chain
management. The purpose of the survey isto examine how MNO performs supply chain
related tasks. One central theme of the survey is to investigate how much outsourcing MNOs
utilize in the market. The relationship between outsourcing and corporate performance will be
examined. A sub objective of this thesis is to identify areas in which outsourcing will make the
most impact in supply chain operation.
1.2
Approach and Thesis Organization
The research methodology of this thesis is depicted in the following diagram:
Aligning Product and Supply Chain Strategies in the Mobile Phone Industry, Scanlon R., Massachusetts Institutes
of Technology, 2009
2
Conclusions
14
Figure 1 - Research Methodology
Because of the complicity of the mobile industry, extensive secondary research was performed
to provide a general understanding of the industry. The research result was used to provide
context for the later stages of research and analysis. The findings of this secondary industry
research are presented in Chapter 2. The findings regarding supply chain management for
mobile devices are presented in Chapter 3.
The selected interview phase was omitted due to a lack of interest by the interviewees. Instead
a set of hypotheses was generated based on secondary research. These hypotheses set the
basis for the industry survey designed. These hypotheses and the rationale behind them are
presented in Chapter 4.
The core of the study is done through primary research with an industry survey. In Chapter 5
the details of the survey are presented. This survey is designed specifically for MNOs to identify
current best practices in the industry.
The survey was sent out research participants in March 2009. In Chapter 6 the data collected is
presented. This chapter also presents the analysis associated with the data and the discussion
on validity of the hypotheses.
Chapter 7 provides the conclusions of the study and presents general recommendation for
MNOs. Potential future research topics are also identified in this chapter.
2. INDUSTRY BACKGROUND
This chapter gives an overview of the mobile device industry. First a general overview of the
industry is given. Then mobile standard isexplained to give context for the industry. Lastly the
operation of the major stakeholders, namely device manufacturer, network operator, and
retailer are described.
2.1
Mobile device Industry
The evolution of mobile devices is a good demonstration on the rate at which technologies can
advance. In 2001 digital cameras were only at their infant stage in the consumer market, yet by
2005 most mobile devices already have digital camera designed into them. In 2007 Apple's
iPhone demonstrated the superiority of touch screen mobile devices, and by 2009, the top five
device manufacturers all have touch screen devices. The clock speed of mobile devices is fast
and mobile technologies evolve quickly. End users benefit from the technological gadgets that
mobile devices provide. For example end users nowadays can use their mobile devices to talk,
to check email, to surf the web, to navigate around town (with GPS functionality), etc. To end
users in remote regions with under developed infrastructure, mobile devices could be the only
way they can get to the internet and communicate with the world. Mobile devices are
functional products that solve problems for their users.
Mobile devices are also fashion product. The form factor, the color, the image, the design, and
the brand together form an identity that isappealing to end users. End users often make new
purchase on mobile device not because of need for functionality but because of need for
fashion. End users often make purchases because they feel the mobile device can help them
express their personality. As a fashion item customer demand can change rapidly and generate
volatility in the market. The difficulty to get accurate demand forecast is very high for new
mobile devices. Patrik Jansson, vice president and head of supply chain operations for Sony
Ericsson recently said at a Supply Chain Conference that "In the month of February, I was
noticing probably the lowest forecast accuracy numbers since I started with mobile phones in
1990. We need to find out newer ways of managing that." 3 The industry has yet to figure out a
better way to get accurate forecast.
The combination of fashion attributes and high rate of technology evolution gives mobile
device supply chain a distinct characteristic: short life cycle. Analyst estimated that average life
cycle of a mobile device is 9-12 months4 . Mobile devices on the shelves of retail store are
constantly changing. On top of that MNOs usually provide contract with a length of one to two
years. The end of contract gives subscribers extra incentives to replace and to upgrade their
phone. The short life cycle of mobile devices forces all the stakeholders in the supply chain to
be extremely adaptive and to be ready to change at any time. New opportunities and new
challenges in the industry can appear with little warning and the one that can change, that can
adapt, and that can response quickest will lead the competition.
The strong growth of the mobile device industry is fueled by technology innovation in
applications, device, and network. Voice applications used to be the main revenue generator in
mobile communication; however as mobile data network mature, mobile data access is
gradually replacing voice communication as the killer apps. In developed market, device
replacement and product upgrade continue to support high sales number of mobile devices. In
emerging market, huge demand for low cost phone is providing solid growth in sales number.
The differences in growth driver between developed market and emerging market demonstrate
a trend in the mobile industry. In emerging markets (where the mobile device industry is
young), cost is a bigger concern and therefore low cost phones are in higher demand. In
developed markets (where the mobile device industry is established), value is of higher
http://www.manufacturingexecutive.com/news/read/ConferenceManufacturingExecsConfesstoDemandForecastingFailure_32682
4 http://www.msnbc.msn.com/id/29258026/
3
importance and therefore applications, services, and high end devices play critical roles. As
market matures, the mobile device industry is evolving from cost driven to value driven.
2.2
Mobile Standard
The first generation of cellular industry is based on analog signal. At this stage cellular
communication was at its infant stage and the technology was not widespread. The second
generation introduced CDMA and GSM. These standards are based on digital signals. The switch
from analog to digital enabled significant improvement, both in call quality and in call reliability.
It was at this stage that cellular phone gained its widespread popularity5 . The global number of
mobile phone subscriber per 100 inhabitants grew from 4 in 1997 to 67 in 20096 . According to
the UN the number of cell phone subscribers reached 4.6 billion in 20107. This tremendous
growth happened mostly during the 2G era.
GSM isthe dominant 2G standard in the world, with an estimate of 80% market share. The
widespread popularity can be attributed to the fact that GSM is an open non-proprietary
standard. CDMA is a standard developed by Qualcomm. It is based on a technology called
code-division multiplexing. With CDMA mobile user will share the same frequency band.
Contrast to GSM, CDMA is not free. A royalty fee has to be paid to Qualcomm for the use of the
technology.
The third generation of standard continues the path of the second generation. The third
generation of CDMA includes 1xRTT, EV-DO, EV-DO Rev A. The third generation of GSM
includes WCDMA, UMTS. All of these standards have their strengths and weaknesses.
Adding to the mix in the 3G category is China developed TS-SCDMA. A big reason that China
wants to develop its own standard is because China wants to climb up the technology chain and
gains knowledge in the field so that by the time 4G arrives China will have the know-hows to
s Measuring the Information Society, International Telecommunication Union,
2010
6 Measuring the Information Society, International Telecommunication
Union, 2010
http://www.itu.int/net/pressoffice/press_releases/2010/06.aspx
influence 4G standard. Having a home grown standard also means huge saving because there
will be no more licensing fee to pay. Since plenty of publications can be found on the technical
aspect of these standards, this section will omit the technical detail.
2.3
Mobile Device Manufacturers
The mobile devices manufacturers are often referred to as Original Equipment Manufacturers
(OEMs). These OEMs supply the industry with new devices equipped with latest technologies
and features.
2.3.1 Market Dynamics
The huge surge in mobile subscriber is supported by plenty of handsets. The battle for market
share in handset market has been fierce. Some companies that dominated that market 10
years ago either ceased to exist or had to change its structure. Ericsson for example, used to be
one of the biggest mobile devices producers, but now it is merely part of the joint venture with
Sony and its market share is under 10%. Siemens, another big mobile devices producer in the
90s, suffered huge financial loss and was acquired by BenQ, a Taiwanese company, in 2005.
The composition of the mobile device market experienced significant changes in this highly
competitive market. The market isvery volatile as dominating player can quickly lose its share.
For example Motorola gained huge success with its Razr model in 2005 but lost almost all its
gain in 2007. Nevertheless the market is getting concentrated with top players having the
majority of the market. Table 1 shows the top mobile devices manufacturer in 20098.
8 http://www.celular-news.com/story/42084.php
Table 1 Worldwide Mobile Terminal Sales to End Users in 2009
Company'
2009 Sales (Millions of Units)
2009 Market Share
Nokia
441
36.4
Samsung
236
19.5
LG
122
10.1
Motorola
58
4.8
Sony Ericsson
55
4.5
Others
299
24.7
Total
1211
100%
2.3.2 Player Objectives and Responsibilities
The objectives of device manufacturers are to design, to manufacture, to market, and to sell
mobile devices. In addition to end users, these devices are also sold to intermediate customer
such as network operators, distributors, retailers. Hence to be successful in the OEM markets,
OEMs must design handsets that satisfy all of their customers. In particular, during the product
design and development phase, the OEMs must carefully examine the different needs and
requirements of all their customers and design products based on their inputs. For example for
the end users, the latest technologies and the aesthetics of the design may be of most
importance. But for the carriers the most important requirement may be the network
standards or the compatibility of software. By involving different parties in the design process,
OEM can receive multiple benefits: the designed product will probably meet customers' needs
better, be cheaper and faster to produce, and fit MNOs mobile network more closely. The
whole value chain will be happier with the end products.
Once the design is developed, the OEMs need to manufacture the design. This includes
electronics manufacturing and final assembly. At this stage, cost and speed are the two
attributes that are of most concerns. As explained in the next section the OEM market has
severe competition and the ability to control cost can be the decisive factor. Many OEMs
recognize the highly efficient contract electronics manufacturers (CEMs) in the market and are
contracting out their manufacturing operation to these CEMs. The largest of such CEMs is
Foxconn, with an annual sales figure of $55 billion in 2008' (Although this number represents all
of Foxconn operation, the sales number can demonstrate the massive size of these CEMs).
CEMs have the economies of scale to reduce manufacturing cost. Their specialty is in
manufacturing and by letting CEMs have ownership of the manufacturing process means more
efficient product for OEMs.
After the product is designed and manufactured, the OEMs objective shift focus to selling and
getting rid of all these devices. The high clock speed of mobile technologies accelerates the rate
at which mobile devices depreciate. Once the mobile devices are produced, they must be
distributed to their consumers as quickly as possible to maintain value. In this stage the
distribution strategies, the logistics strategies, and the sales strategies become important for
the OEMs.
In addition to the above objectives, OEMs also have to ensure their brands are being promoted.
Brand management includes tasks such as generating publicity, advertizing new handsets,
maintaining brand consistency, and promoting brand image. Because end users are often
fashion oriented in making their purchase, brand may significantly affect sales number of new
model. For example even though the functionalities of many HTC smart phones are
comparable to those of the Apply iPhone, the HTC smart phones' market size is no where
comparable to the Apple iPhone market size. One of the reasons is that the HTC brand is not as
well known as the Apple brand. Consumers do not perceive the HTC brand as a brand that will
reflect their personality. Nokia also did a great job in brand management in recent years and its
accomplishment was acknowledged by the industry. According to Interbrand Annual Best
Global Brands Rankingl 0 , Nokia isthe only OEM in the top 10 best global brand for ten
consecutive years. Having a strong brand that users can connect to is crucial for fashion
oriented products such as mobile devices.
9
10
Foxconn annual report
http://www.interbrand.com/bestglobal_brands.aspx
2.3.3 Player Capabilities
The core capability of OEMs is mobile device design and development. It isthis device design
and development functionality that defines them as OEMs. Product design isthe core of their
business. Other tasks such as manufacturing, marketing, and selling are all auxiliary tasks
compare to the main design and development function. Some OEMs even outsource these
auxiliary tasks to third parties. For example, as mentioned previously some OEMs outsource
their manufacturing operation to CEMs and some OEMs outsource their logistics and
distribution operation to third party providers.
2.3.4 Type of mobile devices
The type of devices produced by OEM can be roughly categorized into 3 groups:
Low cost phone:
These devices have monochrome display, no accessible memory and very
limited talk time. These devices are capable of only basic functionalities
such as voicemail and SMS.
Midrange phone:
These devices have accessible memory, camera, and processor. These
devices have the basic functionalities, plus extra features such as camera,
radio, and mp3.
Smart phone:
These devices have high resolution display, advanced application
processor, and operating system. These devices are capable of advance
functionalities such as web browsing, email, personal information
manager, Adobe, MS Office, etc, etc.
The low cost phone is experiencing tremendous volume growth in emerging market,
particularly China and India. Subscribers are using these devices as entry level phone. However
19
the growth in the low cost phone segment does not provide high revenue potential for the
OEMs because of the thin margins. Only OEMs that have the economies of scale and are cost
efficient can reap significant benefit in this segment. The high end phone, or smart phone, is
another story as it offers high revenue potential to the OEMs. Both volume and value growth
have high potential in smart phone. The challenge in this segment is new competition. Google,
Apple, HTC, and Microsoft are all new players compare to the 'traditional' OEMs and
competition will only heighten in the future.
2.3.5 Market Growth
In terms of growth, the devices market grew steadily over the years". In 1997 total mobile
devices shipments were about 100 million units. The number climbed to 400 in 2000 and stayed
at that level during the 2001 downturn. The number started to climb again in 2003 and by 2009,
the number reached 1.2 billion.
In recent years the device market grew despite the economic turmoil. According to a report
roughly 282 million cell phones were shipped in the first quarter of 2008, compare to 247
million in the same quarter of 200712. The growth was approximately 14%. The third and fourth
quarter of year didn't do well as the recession slowed things down and a 5%year to year
decline was observed. Overall the mobile device market had roughly 7%annual growth in
2008.13 In 2009 the market stayed roughly the same with a slice decline of 0.8%.
Looking forward, analysts predicted that the growth in 2010 will be mostly fueled by the Asia
Pacific market, ultra low end devices, and smart devices.
Gartner Press Release, http://www.gartner.com/it/page.jsp?id=1306513
12 http://www.redherring.com/Home/24181
1
http://www.reuters.com/article/pressRelease/idUS148217+07-Jan-2009+BW20090107
2.4
Mobile Network Operator
Cellular subscribers need cellular networks to provide them with services. Mobile Network
Operators (MNOs) are companies that acquire radio frequency band from the government and
provide services to subscriber.
2.4.1 Market Dynamics
Since MNOs need to acquire spectrum from the government, the MNO business is inherently
bounded to regional or country level. Having that said, there are multinational companies such
as Vodafone and T-mobile that have subsidiaries all over the globe and have operations across
borders.
The key MNO players in terms of subscribers include14 :
1. China Mobile (Operate in China including Hong Kong, Pakistan)
2. Vodafone (Operate in Europe, India, Australia)
3. Telef6nica (Operate in Europe, South America)
4. China Unicom (Operate in China including Macau)
5. T-mobile (Operate in USA, Europe)
6. America M6vil (Operate in USA, South America)
7. Telenor (Operate in Scandinavia, Eastern Europe)
Merger and acquisition are common and occur often in the MNO market because they provide
a way to quickly expand range of services. In September 2009 Orange and T-Mobile announced
a deal to merge their UK operations to create UK largest MNO, with 28.4 million customers or
37% of the market. 15 In August 2009 Virgin Mobile USA closed its acquisition of Helio USA in
http://en.wikipedia.org/wiki/Listof mobilenetworkoperators
is http://www.guardian.co.uk/business/2009/sep/08/orange-tmobile-merger
14
pursue of the booming postpaid market 16 . Helio is an excellent example of new entry in the
MNO market. Typically new entries are smaller, more focus, and more adaptable to fast
changing environment. New entries and new MNOs from M&A are creating a market with
severe competition where competitive advantages, market share, and subscriber base are
difficult to maintain.
One way the MNOs are using to fend off competition is by lobbying regulators. In the US mobile
devices sold by MNOs have an embedded lock that prevents the device from operating in other
MNOs' networks. In the US net neutrality does not apply to the mobile networks and MNOs can
arbitrary block mobile applications even though the activities performed by the applications are
perfectly lega117 . Consumer groups argue that these business practices are harmful to
consumers by limiting competition. They want the Federal Communications Commission (FCC)
to step in and to add preventive measures to loosen the competitive constrains. The MNOs on
the other hands suggest that the market isalready highly competitive and further regulation is
not needed. The MNOs are using their lobbying power to ensure the FCC will not set rules to
force the market to be more open.
2.4.2 Evolution of Mobile Network Operators
Many MNOs in the market have a long history in the greater telecommunication industry and
did not start as a MNO in the beginning. AT&T for example started as a typical telco company
and provided fixed line telephone service. In Canada the MNO Rogers Wireless was a cable
company in the 70's. Often these companies were semi-public telecom conglomerates that
operated as monopoly on certain resources and had deeply established procedures and
protocols to do business. As mobile technologies mature in the 80's and 90's, they added
mobile communications into their product offering and then separate a subsidiary organization
to manage the mobile business. This historical background has huge impact on the way current
16
http://www2.prnewswire.com/cgi-bin/stories.p?ACCT=109&STORY=/www/story/08-22-
2008/0004871874&EDATE=#
17 http://www.wired.com/epicenter/2009/05/mobile-carriers-tout-app-stores-to-fend-off-regulators/
MNOs operate. Mobile devices are high clockspeed fashion and technology driven devices that
are very different from other telecommunication products. The culture and the business
practices in traditional telco companies may not be suitable for mobile devices.
For example vertical integration is common in telco companies because it helps to reduce cost.
However does vertical integration make sense for mobile devices? Take distribution, logistics,
and retail for example, these are tasks that are new to teleco companies. Telecom companies
never had to sell physical products with such high fashion attributes. The MNOs that were spun
off from telecom conglomerates did not inherit any capabilities to handle these tasks and the
culture they did inherited may actually deter their ability to perform effectively. Since the rate
of technology change isvery high for mobile devices, decisions regarding their logistics
strategies and retail strategies also need to be made quickly. If bureaucracy from the past is
embedded in the organization, then extensive meetings and processes may affects the speed at
which decisions are made. MNOs with long history in the telecom industry need to re-invent
themselves and adapt to the new mobile device environment.
2.4.3 Player Objectives and Service Offerings
The main objective of mobile network operator is to provide mobile communications services
to subscribers. Traditionally MNQs provide services that revolve around voice communications
such as mobile communications, voice mail, and call forward. As mobile data network matures,
services enabled by data network greatly expand the offering portfolio. Some of these data
network enabled services include mobile internet access, location based services, music
download, ringtone download, device theme download, mobile television, high speed
broadband and many more. MNOs need to select the set of services that are most desired by
their subscribers.
As different MNOs make different selections, subscribers are using these services to set the
different MNOs apart and to make their purchasing decision accordingly. For example, AT&T
America has a portfolio of services that are specifically designed for business users. One of such
services is called "Document to Go"1 8 , it allows users to "create, view, and edit Word, Excel,
PowerPoint, and PDF files on Smartphones" Business professionals that are always "on the go"
will be attracted by the convenience that this service provide and will probably select AT&T as
their service provider. The competition between MNOs is more in the service field rather than
in the technology field. MNOs are using their services offering to win subscribers businesses.
To compliment on their service offering, some MNOs also offer mobile devices to their
subscribers. In this sense they are similar to retailers. The MNOs strategically select mobile
devices that will best deliver their services so that subscribers can receive the maximum value
these services provide. Mobile devices that MNOs offer include low cost phones, mid range
phones, smartphones, and even netbooks19 . The MNOs obtain devices from OEMs directly and
bundle these devices to their service plans. Selling as a bundle can attract new customers and
reduce churn.
Besides providing excellent services to attract subscribers, the other main objective of MNOs is
to maximize the average revenue per user (ARPU). One way to achieve this objective isto
expand into other markets. For example although low cost phone markets have thinner margin,
they offer high potential opportunities for growth, especially in emerging regions. To reduce
churn MNOs need to generate subscriber stickiness. This can be done by offering distinctive
and unique services, or by using contractual payment methods.
MNOs provide either prepaid payment plan or postpaid payment plan to their subscribers.
Prepaid plans are designed for subscribers who do not want to sign any contract with the
MNOs. Subscribers purchase minutes before usage and replenish them as needed. Hence
prepaid plans are often correctly referred to as "Pay-as-you-go" plans in marketing material. To
18http://developer.att.com/certifiedsolutionscatalog/smbapplication_detail.jsp?navAction=push&topMenu=smbs
olutions&navCount=23&solutionld=3600009
19 http://www.wireless.att.com/cell-phone-service/specials/netbooks.jsp?wtSotClick=1-002MFP-0-1&WT.svl=title
24
the subscribers prepaid plans offer flexibility and freedom, but to the MNOs prepaid plans offer
irregularity of revenue. Prepaid plans do not generate a regular and stable stream of revenue
from their subscribers and as a result the ARPU of prepaid plan is lower compare to postpaid
plan. This is one of the reasons why MNOs prefer customers to sign up for postpaid plan
whenever they can. With postpaid plan subscribers agree to a contract with the MNOs and
commit to monthly payment. As a way to incentivize subscribers to sign up for postpaid MNOs
provide heavy discount to handset and postpaid plan bundle. Postpaid plan is an excellent way
to generate subscriber stickiness and to reduce churn.
2.4.4 Player Capabilities
The core capability of MNOs is the ability to acquire and to retain customers by developing and
operating mobile network. It isthis network operation capability that defines them as MNOs.
Network development capabilities include expanding network to new regions (e.g. rural areas),
managing network technology migration (e.g. from 2G, to 3G, to 4G), developing network
technologies to support new applications on the networks (e.g. VolP, mobile TV) and
maintaining quality of service as more subscribers join the network. The reward of having well
operated mobile networks is that valuable services can be provided to subscribers and more
businesses will be generated for the MNOs.
2.4.5 Market Growth
The MNO industry is also growing steadily with the mobile industry. The global mobile
subscriber growth for 2009 isestimated to be around 13%20 and the estimated 5 year
compound annual growth rate is around 5%. This growth is mainly fueled again by the AsiaPacific regions and other industrializing countries. The market value of the mobile operator
industry is also growing. The estimated 5 years compound annual growth rate is around 3%,
with Asia Pacific and other emerging markets fueling the growth.
20
http://www.marketresearch.com/product/display.asp?productid=2156557&g=1
The margin for voice services is thinning out as voice communication gradually becomes a
commodity. Nevertheless voice service is predicted to remain as the main revenue generator
in the near future and contribute to roughly 73% of the global revenue. In contrast the margin
for data services remains high. Hence many MNOs are offering more data services and other
high quality services to attract and to retain customers. Analysts forecasted the total service
revenue for operators will reach $1.1 trillion by 2013, up 23% from 2008 . The overall profit
margin for network operators is roughly 30-50%, which is significantly higher than other players
in the value chain.
2.4.6 Strong Growth Region
Similar to the case with OEMs, Asia Pacific is providing the growth for the MNO market and is
forecasted to be the biggest market both in terms of subscription and data service revenue by
2013. These forecasts should not surprise anyone since China Mobile and China Unicom
combine already accounted for over 600 billion subscribers in 2009. With these numbers the
MNOs in China will certainly have influence on how the MNO industry will evolve in the future.
2.5
Mobile Device Retailer
The different ways to buy mobile devices can be categorized into 2 channels: the direct channel
and the indirect channel. The direct channel includes stores that are owned and operated by
MNOs. The indirect channel includes stores such as chain department stores (Best Buy),
independent retailers (Mega Mobile Boston), and online stores (Amazon).
The objective of mobile device retailers is simple: to sell mobile devices. They want the devices
to move quickly and they want minimal inventory risk. These are common objectives for
21
http://www.ecnasiamag.com/article-25149-emergingmarketsanddatawilldriveglobalmobilegrowthto2Ol3-
Asia.html
retailers of fashion items. The longer the merchandize sits in the inventory, the less value the
merchandize will retain. It is crucial for mobile device retailers to have just enough stock to
satisfy all their consumers while minimizing inventory. Supply chain management is an integral
part of mobile device retailer's activities.
3. MANAGING THE SUPPLY CHAIN FOR MOBILE DEVICES
The term supply chain management is usually associated with activities such as inventory
management, logistics, sourcing, and other activities that have to do with manufacturing and
delivering products to customers. However the term actually includes activities that create and
design product. A broader definition of supply chain should include both Development Supply
Chain and Fulfillment supply chain. This section will give an overview of the supply chain for
mobile devices.
Development Supply Chain
3.1
The objective of development supply chain management isto design the best product with high
quality and lost cost. The development supply chain includes the following activities:
Plan / Design - In this stage, the company design the product architecture, decide on
"
whether to make or buy components, and basically design the whole product. The
company should get suppliers involved in this stage because availability and price of
components can have pivotal effect in design decisions.
*
Source - In this stage, the company select suppliers, draft supply contracts, and form
strategic partnerships. Well written supply contract and good supplier partnerships can
clarify and solve many problems in the future
Produce -This is the actual manufacturing stage.
"
3.2
Fulfillment Supply Chain
The fulfillment supply chain deals with the physical flow of goods from suppliers to customers.
The fulfillment supply chain includes the following activities:
*
Supply - Getting supply from suppliers
e
Produce - Manufacture the device
e
Distribute - Distribute to various channels to sell
" Sell - Sell the device to the customer
Typical challenges in the fulfillment supply chain are issues relating stock level, lead time, and
flexibility.
As stated in the opening paragraph of this section, the fulfillment supply chain is the supply
chain that people think about most of the time. To reap full benefits of good supply chain
management both the development chain and the fulfillment chain need to be efficient and
they need to be well integrated. Figure 2 depicts how the two supply chains interact:
Figure 2 Development Supply chain versus Fulfillment Supply chain
Plan/Design
-
Source
E
0.
Supply
ON*
Produce
m
Distribute
m}* Sell
Fulfillment Supply Chain
3.3
Mobile Device Supply Chain
The mobile device supply chain involves many stakeholders. There are the component
suppliers, the manufacturing plants, the design houses, the service providers, the distributors,
and the customers. The relationship among these stakeholders can be depicted in a scenario
illustrated in Figure 3.
22
Figure 3 Interaction between different stakeholders inthe mobile device supply chain
The complexity involved with the mobile device supply chain isvery high. The chain has many
suppliers (up to the hundreds), many manufacturing facilities (often over ten), and many
distribution centers. To manage all these stakeholders efficiently poses a huge challenge to
supply chain managers.
A possible scenario of the supply chain operation may be as follow:
" Sprint detected that their consumers want touch screen handset
*
Sprint requested Motorola to design handset to support the new demand.
*
Motorola designed the new handset with inputs from consumers, component suppliers,
and service providers, i.e. Sprint
*
Motorola selected Flextronics as the manufacturer for the design
*
Flextronics examined its list of supplier and selected suppliers for the new design. For
example, Flextronics selected Sanyo for battery, RFMD for Electronics.
22
The Development Supply Chain, Prof. Martinez de Albeniz, ESD.763 Lecture Notes, 2008
"
Flextronics manufactured the new handsets and shipped to Motorola
e
Motorola distributed the new handsets to various sales channel such as service
providers (Sprint), distributors, wholesales, outlet retailers (Wirefly), and chain retailers
(Bestbuy).
" Sprint received new handsets from Motorola and stored them in central warehouse
*
Sprint customized new handsets with Sprint specific software
e
Sprint distributed the new handsets to their retail stores
" Sprint retail store promoted the new handsets and sold new handsets to consumer
e
(After two years) Consumer is ready to upgrade to another handset and returned
Motorola handset to Sprint
This scenario illustrated the process flow in the mobile device supply chain. The scenario also
touched upon several pain points in the supply chain, namely procurement, forecasting,
distribution, and sales management. The following sections examine each of these pain points
individually. The discussion is oriented from the MNO perspective.
3.3.1 Procurement
MNOs need to provide the most suitable handsets to their customers, whenever they want,
wherever they want. With the strong fashion components of fashion devices, predicting what
customers want can be very difficult. Since different ethnicity, different culture, different
countries will have different taste, experience and knowledge in other markets may not be
applicable and therefore may not help. MNOs need to engage with their customers often and
collect their comments on what they need. MNOs can utilize their retailer for such tasks.
Compare to other players in the supply chain, MNOs have the advantage that they own direct
customers facing stores. They can gather first hand information on what customers need. The
challenge here is to effectively propagate the information collected to upstream decision
maker. The information must be shared quickly because customers demand may change
rapidly. Decision maker can then use the information to select handsets that are most
appealing to customer and that are most suitable for their network.
3.3.2 Forecasting
For MNO to place bulk order of mobile devices from OEMs, MNO needs to determine the order
size for each design. The biggest challenge with procurement is that MNO has to predict the
exact quantity to order for each handset. This requires forecasting of end users demand and it
is a daunting task. If the MNOs order too much, then excess handsets will not be able to sell
and will depreciate in the inventory. If the MNOs order not enough, then shortage will happen
and there will be lost sales opportunities. The MNOs also have to predict when to place the
order for the new models. For example more quantities may be needed for the holiday season
than the regular season. Different models may have different adaptation pattern. High end
smart phones may experience sharp decline in sales after initial promotion, whereas low end
basic phones may experience more consistent and regular sales pattern. Forecasting for mobile
devices is an extremely complicated task.
MNO can do forecast in different ways. MNO can make forecast based on historical data from
similar handsets, and then make adjustment based on current market and competition forces.
MNO can also make forecast based on customer segments. This way MNO will need to predict
how many customers in each segment will be interested in the new device. However since
different customer segments may have some share customers, MNO will need to make
adjustment to eliminate any double counting issues. The challenge with making forecast in
these two methods is that they require adjustment that is subjective. For example it isdifficult
to quantify the amount of adjustment needed to correct for market situation. It is challenging
to forecast accurately and to match inventory with customer demand without a more scientific
method.
3.3.3 Distribution and Logistics
To be profitable in the competitive market, MNO needs to have good control on cost.
Distribution and Logistics are two areas where cost can have big impact. MNOs need to
maintain the inventory, operate the warehouse, and distribute the handsets to the retailers.
Each of these activities can be a pain point to MNOs.
For inventory MNOs want to have high stock availability for 'hot' products, but at the same
time they also want to minimize slow moving stock. Inventory is needed because of there are
supply uncertainty and demand uncertainty. To put into perspective, AT&T had $749 million of
inventory in 20083. MNOs need to make sure they have product to sell if there is a spike in
demand. Since OEMs have lead time in delivery, MNOs must ensure they have inventory to
prevent any lost sales opportunity. Due to the fast depreciation rate of mobile devices, slow
moving stock can be a huge burden to MNOs. Once the stock is in the warehouse, MNOs will
have to manage the warehouse operating cost. Facility security may be of concern in this stage.
Inventory management is also directly related to logistics strategy. MNOs need to decide how
much inventory should each store maintain and how often to deliver new inventory. This is the
tradeoff between inventory cost and transportation cost.
For logistics MNOs need to find transportation partners to deliver handsets. Logistics can be
problematic in rural regions where stores are sparsely located. This problem is magnified in
rural regions of emerging countries where transportation infrastructure is under-developed.
(For example, the mountainous regions of China and the Amazon in Brazil are both hard to
reach places). Their logistics network and transportation network are often fragmented. Since
these developing countries offer high growth potential, MNOs cannot ignore them and must
find ways to reach them reliably. Partnering with local transportation partners may be a good
solution to solve problematic logistic issues.
23 AT&T
2008 Annual Report, AT&T, 2009
All of these distribution and logistics activities are common to any merchandize driven industry,
but they are new tasks for network operator. MNOs have strength in operating mobile
networks, not operating distribution and logistics network.
3.3.4 Sales Management
There are many ways to sell new handsets. Possible channels include MNOs own retailers, chain
retail partners, online stores, licensed stores, exclusive dealers and telemarketing.
Coordination between theses stores is challenging. Wide varieties of retail store and large
number of retail point mean high volume of mobile devices. Each retail point poses inventory
issue, distribution issue, and logistics issue. MNOs need to work with each retail point to
minimize overall supply chain cost. Also as mentioned in previous section, MNOs also need to
collect information from these retail points to gather feedback from customers. The complexity
with the vast number of retail points may exceed MNOs ability in sales management.
4. RESEARCH QUESTIONS AND HYPOTHESES
Before we proceed, let recap on the objectives for this study. The main purpose is to
understand the characteristics of mobile devices supply chain for mobile network operators.
One of the objectives isto investigate the relationship between product strategy and supply
chain management strategy. Another objective is to identify best practices in supply chain
management for mobile network operators.
Based on the secondary research on the industry and its supply chain, three research questions
are formulated. This chapter examines each of these research questions in detail.
4.1
RQ1: Product Strategy and SCM Strategy
In the OEM study of this research, it was shown that OEMs whose products compete on
innovation over price tend to want a supply chain that is more flexible than efficient. This result
makes sense because OEMs have direct control on the manufacturing of mobile devices. As
manufacturer, the OEMs are at the centre of both the development supply chain and the
fulfillment supply chain. Hence OEMs have more power to align their supply chain strategy with
their product strategy. Also in addition manufacturers have the culture and history working
with supply chain. It is not surprising that OEMs know what type of supply chain strategy would
best match their product. For OEMs that compete on innovative features, they would
implement a supply chain that allows them to change quickly as demand changes. For OEMs
that compete on prices, they would implement a supply chain that is highly optimized to ensure
that all costs are minimized. The situation however is not as clear with MNOs. This research
question is aimed to identify the relationship between MNOs' supply chain management
strategies and their product strategies.
For MNOs, product strategy is the corporate level strategy that defines the type of mobile
devices that the mobile network would sell. As described in the Chapter 2, the range of mobile
35
devices in the market is very wide. The choice on which types of mobile devices to sell depends
on the purpose on why the MNOs are selling mobile devices. To simplify the study the various
reasons for MNOs to sell mobile devices are mapped into two dimensions:
1. To improve customer retention. This strategy is customer focused in which it tries to
improve customer retention by providing customers the mobile devices they demand.
2. To generate additional revenue stream, either by trying to upgrade customers' devices
so that customers can utilize more network services or by selling mobile devices as a
retailer.
Supply Chain strategy for MNOs is the corporate level strategy that defines how the supply
chain should function. Supply chain strategy finds the balance between attributes such as cost,
flexibility, reliability, and time. To simplify the study the different dimensions of supply chain
strategy is mapped into two attributes, namely cost and flexibility:
1. Cost - This attribute incorporates all the strategies that are cost focused. The primary
objective for this supply chain isto maximize the reduction of cost. This can be done in
many dimensions. The supply chain needs to
e
minimize wastage (human resources and materials)
e
to be reliable to reduce (to minimize re-work)
Current practices in supply chain management often focus in cost reduction. Companies
such as Toyota, Foxconn demonstrated how cost can be driven down to bare minimum
when supply chain processes are well designed.
2. Time - This attribute incorporates all the strategies that are time focused. The primary
concern here isto ensure that the supply chain can bring products out to customers
quickly. This can be done in many dimensions. The supply chain needs to
e
to be fast and just in time
e
Adaptive (so that any disruption will not affect overall time)
*
Modularize (to minimize disruption to other parts when changes are
made)
*
Integrated (to ensure new information are communicated quickly)
Depending on MNOs purpose on selling mobile devices, their supply chain management
strategies should be different. To test the relationship between product strategy and SCM
strategy, the following hypothesis isformed:
Hypothesis 1:
MNOs with customer retention as product strategy are likely to be more
concerned with reducing time in their supply chain, whereas MNOs with
addition revenue generation as product strategy are likely to be more
concerned with reducing cost in their supply chain.
If customer retention isthe primary concern, MNOs will have to ensure their customers are
always satisfied with their services, and be able to provide mobile devices that their customers
want. If customers do not see their desired mobile devices present, they will have a reason to
switch carriers. Hence Time to Market and Order Fulfillment Time is crucial for customer
retention.
If the reason for selling mobile devices is to generate an additional revenue stream, then
reducing cost would most likely be a concern because profit is maximized when cost is kept to a
minimum.
4.2
Outsourcing and Overall Performance
Secondary research suggests that MNOs strength may not align well with the strengths needed
for supply chain management. MNOs strengths include network operation, mobile
technologies, and mobile services. Selling handsets and supporting supply chain of handsets.are
new activities for MNOs. The skill sets required are different from the traditional skill sets that
MNOs have. Supply chain management includes activities such as product forecast, logistics,
and sales management. MNOs have no expertise in any of these activities. Outsourcing can be
an effective way to offload these activities to domain experts. To test the effectiveness of
outsourcing, the following hypothesis isformed:
Hypothesis 2:
Outsourcing supply chain management is an effective strategy for MNOs
to focus more on their core competencies.
Outsourcing can improve corporate performance because MNOs can focus on tasks that they
are good at. Other supply chain related tasks can be outsourced to various specialists to handle.
For example logistics functions can be given to DHL, procurement functions can be given to
BrightStar. These domain experts have the scale of economy to become efficient and best in
class in their fields. By outsourcing to these domain experts the overall performance of MNOs
can improve.
However outsourcing is not without any negatives. With outsourcing MNOs will have less
control on the overall supply chain. This could have several effects:
1. Responsiveness - More outsourcing means more stakeholders. Therefore more parties
need to be coordinated. When unexpected event occurs, more parties need to be
notified. Outsourcing may affect the overall responsiveness of the supply chain.
2. Flexibility - With outsourcing MNOs may have less control. MNOs may not be able to
execute exactly what they want. Services offered by third parties may not be aligned
perfectly with MNOs strategy.
3. Cost - Can outsourcing save overall cost? Or would the extra communications and extra
steps needed to manage outsourced parties incur a high cost to MNOs?
Research Question Two will examine this issue in detail.
4.3
Most Beneficial Outsourcing Areas
This research question is an extension to the second research question. After the effectiveness
of outsourcing is examined, the specific areas for outsourcing that will bring the most corporate
performance improvement are identified. In particular, the study focused on logistic operation.
Logistics has huge impact on the time needed to get products into customer's hand. How are
MNOs handling logistics? Can logistics specialists help MNOs? Since subscribers are getting
their devices from MNOs, the associated logistics and reverse logistics operations can have
huge impact on the MNOs' image. Can third party logistics providers help MNOs get products
out to their customers quickly while improving corporate performance?
Research Question Three will examine these issues in detail.
5. INDUSTRY SURVEY DESIGN
The primary research method used in this study is an industry survey that was administered to
MNOs around the world. The next section explains the survey design.
The survey can be broken down into three major sections:
*
Strategy
e Supply Chain Structure
e
Performance
In order to encourage participation, no questions were asked that would jeopardize the
anonymity of the participants.
The first section was designed to get insight into the strategy of the company. The information
collected was used for RQ1. The second section was designed to examine the supply chain
structure. The section included four subsections that deal with specific aspects of the supply
chain. These questions along with the performance section allowed us to study RQ2, the impact
of outsourcing. The third section was designed to gather performance data about the company.
This information was used throughout the whole research.
e Participant
9eIntegration
Info
*Product Info
and Strategy
eSupply Chain
Strategy
eDistribution
eLogistics
Figure 4 - Survey Design
*Reverse
Logistics
orporate
eSupply Chain
Participant Information
5.1
The intent of this section isto gather information about the participant. Insights regarding their
level of responsibility and their visibility within the organization will be obtained. The
information will be used to understand the average respondent and to estimate how accurate
the data may be.
Some of the questions included in this section are:
*
Which of the following best describes your job title?
e
Your primary area of responsibility is ...
*
Your scope of responsibility is ...
If your scope of responsibility is local, country, or regional, please specify the region in
which your responsibility lies.
*
Your network is located in (select all that apply) ...
5.2
Supply Chain Management Strategy
The intent in this section isto understand the tradeoffs that are made when implementing the
supply chain (tradeoff between cost, flexibility, reliability, and time). Although there are "best
practices" for supply chain management, companies must prioritize how they want to
implement their own supply chain.
This section asks to what extend does the participant agree with the following statements:
" Reducing cost isthe primary objective of supply chain management activities
e
Increasing supply chain flexibility isthe primary objective of supply chain management
activities
e
Increasing supply chain reliability isthe primary objective of supply chain management
activities
*
Reducing time to market is the primary objective of supply chain management activities
Reducing order fulfillment lead time is the primary objective of supply chain
*
management activities
5.3
Product Info and Strategy
The intent in this section is to understand the type of products that are serviced by this supply
chain based on major attributes (phone type, market), as well as the reasoning on why mobile
devices are sold. There are two main reasons for MNOs to sell mobile devices:
1. To improve customer retention. This strategy is customer focused in which it tries to
improve customer retention by providing customers the mobile devices they demand.
2. To generate additional revenue stream, either by trying to upgrade customers' devices
so that customers can utilize more network services or by selling mobile devices as a
retailer.
The information collected here will be used to correlate with Supply Chain Strategy for RQ1.
5.4
Integration
The intent in this section is to measure how well the fulfillment supply chain is integrated, both
internally and externally. These questions can be combined into one quantitative measure of
integration (integrated vs. disjoint), and can be used to compare with other aggregated
variables.
Integration is considered a key method to improve supply chain performance. In order to get
into details on exactly how integration occurs (e.g. specific ITsystems, etc), some specific
questions are presented and it isexpected that some of which may not be answered.
This section asks to what extend does the participant agree with the following statements:
"
Key performance measurements are well known and used consistently within your
organization
" Processes are well documented and are consistent within your organization
*
Point of sales information is shared among supply chain partners
" Inventory levels are shared among supply chain partners
*
Work in progress levels are shared among supply chain partners
*
Common technologies for data exchange are used between supply chain partners
e
Sales forecasting is a collaborative process between supply chain partners
e
Supply chain partners are involved in key decision making activities
e
Goals and incentives are aligned between supply chain partners
*
We provide incentives to mobile device suppliers to share risk (e.g. payback contracts,
advance purchase contracts)
*
Mobile device suppliers provide incentives to us to share risk (e.g. buyback contracts,
rebates)
5.5
Distribution
The intent in this section is to determine the extent in which the distribution operation is
outsourced. This section includes questions that can provide additional details to the logistics
operations, e.g. questions regarding distribution channels and end points of supply chain.
This section asks to what extend does the participant agree with the following statements:
" Inbound volumes from point of manufacturing are controlled by our distribution
network
*
In our network, mobile devices are distributed from regional (e.g. North America,
Europe) distribution centers directly to the stores or retailers
*
In our network, mobile devices are distributed from country distribution centers directly
to the stores or retailers
In our network, mobile devices are distributed from local distribution centers directly to
"
the stores or retailers
*
All mobile devices follow the same distribution path, from suppliers to retailers
*
Transshipment strategies are used between your own retail stores
e
Cross docking strategies are used at distribution centers
" We rely on third parties to develop the distribution network
e
We rely on third parties to operate the distribution network
This section also collects information on where devices are sold:
*
What share of your mobile devices is sold in your own retail stores?
" What share of your mobile devices is sold online?
" What share of your mobile devices is sold in third party retail stores?
e
Do you use different sales channels for different handset types?
5.6
Logistics
The intent of this section isto understand the role of 3PL's (mainly outsourced vs. done in
house), and modes of transportation (slow & low cost vs. fast & high cost). These information
can be used to correlate with product and market information.
This section asks to what extend does the participant agree with the following statements:
e
Third party logistic providers are used
e
Logistics is a source of competitive advantage in your industry
e
A general trend is to use more third party logistics providers
e
If used, third party logistics providers are used primarily to allow your organization to
focus on its core strengths
*
Cost is the most important criteria in selecting logistic providers
e
Flexibility is the most important criteria in selecting logistic providers
e
Reliability isthe most important criteria in selecting logistic providers
"
Logistics providers are sourced on central level
" Logistics providers are sourced on regional level
e
5.7
Logistics providers are sourced on country level
Reverse Logistics
The intent of this section isto determine how much reverse logistics are outsourced
(outsourced vs. in-house reverse logistics), and to determine what type of repair model is used
(cost vs. turnaround time).
This section asks to what extend does the participant agree with the following statements:
*
Reverse logistics and repair activities are outsourced
*
Cost is the most important consideration when designing the reverse logistics supply
chain
*
Turnaround time isthe most important consideration when designing the reverse
logistics supply chain
e
Different return and repair processes are used based on phone type (Ultra low cost, low
cost, enhanced, smart)
e
Different return and repair processes are used based on market
" Different return and repair processes are used based on sales channels
e
Reverse logistics are designed independently from forward supply chain logistics
e
Reverse logistics is gaining importance in supply chain planning activities
e
Reverse logistics and repair activities are handled by Network Operators and not
Original Equipment Manufacturers
5.8
Corporate Performance
The intent of this section isto gauge performance against competitors. A relative scale is used
because anything more in-depth would easily identify the company and make people hesitant
to answer. An assumption in this section isthat participants know how they are doing relative
to their competitors.
The participants are asked to compare their performance to the industry average in the
following categories:
"
Profitability
e
Growth of Profitability
*
Market Share
e
Growth of Market Share
*
Return on Investment
5.9
Supply Chain Performance
The intent of this section isto gather key performance indicators that can be used to determine
how well the supply chain performs on a couple of different objectives.
The following key performance indicators are asked and they are based on industry standard
metrics.
*
Inventory days of supply (days)
e
Cash-to-cash cycle time (days)
e
Total obsolescence for WIP, and finished goods inventory (%of revenue)
On time delivery performance to requested date (%)
e
Order fulfillment lead time (days)
*
Forecast accuracy (%of sales revenue)
6. SURVEY RESULT AND ANALYSIS
Survey Participation
6.1
Of the 2,560 invitations, 112 chose to participate in the survey. However, not all participants
completed all three sections of the survey. The numbers of responses received by section are:
Section I, Strategy: 74-112responses
Section II, Structure: 51-67 responses
Section III, Performance: 26-51 responses
Responses by Section
120
100
LI)
Q)
80
0
0L
S60
+-
0
-
20fh.
40
0
1
11
21
31
41
51
61
71
81
Question Number
Figure 5 - Responses for the survey
Over 80% of the respondent are manager or above in the company. Their visibility in the
company should be clear enough that their responses reflect the real situation. Other
participant job titles include Assistant Manager, Procurement Specialist, Senior Buyer, and
Technician.
Participant Job Title
President / CLevel Executive,
10
Figure 6 - Participant Job Title
The respondents have a wide range of responsibility. The following figure shows the primary
area of responsibility of the respondents.
Figure 7 - Primary Area of Responsibility
Other areas of responsibility include Strategy, Business Development, R&D, General
Management, Finance, Sales. Notice that large number of participants is in Marketing. Their
knowledge and experiences in supply chain management may not be sufficient to accurately
answer some questions in the survey.
The following two figures show the scope and region of responsibility of the respondents. There
are good mixes of respondent from different regions, with different scope.
Scope of Responsibility
Figure 8 - Scope of Responsibility
Region of Responsibility
South America, 5
Figure 9 - Region of Responsibility
L
m
LNorth America
,1
Product Strategy and SCM Strategy
6.2
Depending on the MNOs purpose on selling mobile devices, their supply chain management
strategies can be different. To test the relationship between product strategy and SCM
strategy, the following hypothesis isformed:
H1:
MNOs with customer retention as product strategy are likely to be more concerned with
reducing time in their supply chain, whereas MNOs with addition revenue generation as
product strategy are likely to be more concerned with reducing cost in their supply chain.
If customer retention is the primary concern, MNOs will have to ensure their customers are
always satisfied with their services, and be able to provide mobile devices that their customers
want. If customers do not see their desired mobile devices present, they will have a reason to
switch carriers. Hence Time to Market and Order Fulfillment Time is crucial for customer
retention.
If the reason for selling mobile devices isto generate an additional revenue stream, then
reducing cost would most likely be a concern because profit is maximized when cost is kept to a
minimum.
To test the hypothesis, MNOs responses to product strategy and supply chain strategy are
analyzed. The results are shown in the following figure.
The primary objective of supply chainmanagementstrategy is to
reduce time?
MNOs with Customer Retention
as Primary Product Strategy
MNOs with Revenue as Primary
ProductStrategy
Figure 10 - Corporate Strategy vs. SCM Strategy I
90% of MNOs that sell handsets for customers retention said the primarily objective of their
supply chain strategy is either to reduce time to market or to reduce order fulfillment time
(Compare to only 64% for MNOs that sell handsets for additional revenue streams)
The data suggest that the first half of the hypothesis isvalid. That is, MNOs with customer
retention as product strategy are likely to be more concerned with reducing time in their supply
chain.
For the second half of the hypothesis, it is not as clear.
The primary objective of supply chain management strategy is to
reduce cost?
MNOs with Customer Retention
as Primary Product Strategy
MNOs with Revenue as Pimary
Product Strategy
Figure 11 - Corporate Strategy vs. SCM Strategy II
54% of MNOs that sell handsets for additional revenue streams said the primarily objective of
their supply chain strategy isto reduce cost (Compare to only 64% for MNOs that sell handsets
for customers retention). The data do not provide support for the second half of the
hypothesis. It is unclear that MNOs with generation of additional revenue as product strategy
are likely to be more concerned with reducing cost in their supply chain. Reducing cost
appears to be just as important for MNOs focused on customer retention.
6.3
Outsourcing and Performance
To test the effect of outsourcing to performance, an outsourcing index is created to capture
whether the participant outsources Distribution, Logistics, and Reverse Logistics operations.
The following charts show the plots between this index and corporate performance data. No
significant correlation can be observed in the results. The data suggest that outsourcing does
not guarantee better corporate performance. MNOs can outsource many of their operations
but corporate performance may not improve. It is unclear what the effect is of outsourcing on
Profitability, Return on Investment, or Growth in Market share.
Level of Outsourcing v.s. Profitability
5
4.5
4
-
3.5
rn
3
0
S2.5
2
1.5
1
1
1.5
2
2.5
3
3.5
4
4.5
5
4
4.5
5
Level of Outsourcing
Figure 12 - Outsourcing vs. Profitability
Level of Outsourcing v.s.
Growth in Profitability
5
4.5
-Q
3.5
0
C
2.5
2 2
1.5
1~
1
1.5
2
2.5
3
3.5
Level of Outsourcing
Figure 13 - Outsourcing vs. Growth in Profitability
Level of Outsourcing vs.
Return on Investment
5.
54-*
*
4-
E
4-
2
1.5
1
2.5
2
3
3.5
4
4.5
5
4
4.5
5
Level of Outsourcing
-C 14 - 4Outsourcing vs. ROI
Figure
Level of Outsourcing vs.
Growth in Market Share
e,45
C
.5
2-
1.5
1
1
1.5
2
2.5
3
3.5
Level of Outsourcing
Figure 15 - Outsourcing vs. Market Share
MNOs need to identify the specific areas to outsource in order to improve performance.
6.4
Beneficial Outsourcing Area
The effect of outsourcing logistics operation is examined in detailed. The following figure shows
the level of logistics operations outsourced versus the percentage of On Time Delivery. The
graph shows that by outsourcing logistics operations, MNOs have a higher chance of on time
delivery. If MNOs outsource logistics operations, on-time delivery can be achieved over 80% of
the time. However, if the level of outsourcing in logistics is low, it is uncertain whether on time
delivery can be achieved. This result suggests that logistics operation can be an excellent
candidate for MNOs to outsource to third party provider.
Higher chances of
On-time delivery
Logistics Outsourcing v.s.
On Time Delivery
100
S80
E
60
420
0
1
2
3
4
Level of Logistics Operations outsourced
On-time delivery
uncertain
Figure 16 - Outsourcing vs. On Time Delivery
5
MNOs view cost as the most important consideration in designing their reverse logistics
strategy. Roughly 60% of the participants are more concerned with cost than turnaround time
in designing their reverse logistic strategy. Whether repair activities are handled by the MNOs
or the OEMs doesn't affect this result. Of the MNOs that are concerned with cost, 75% of them
outsourced their reverse logistic operation.
Primarily Concern in Reverse Logistics
Turnaround
Time, 41%
Of those that concern with cost, 66% outsourced their reverse
logistic operation
Inhouse, 25%
Outsourced,
75%
Figure 17 - Effect of Reverse Logistics
This result suggests that there are significant opportunities for third party logistic provider in
the reverse logistic domain. For MNOs that are cost sensitive, outsourcing reverse logistics can
be a viable solution.
7. Conclusions and Implications
The purpose of this study is to understand and get insights on the characteristics of mobile
device supply chain management for mobile networks operators. The high level goal is to
examine how supply chain management strategies affect overall performances of mobile
network operators. The relationship between corporate strategy and supply chain strategy is
examined. The effectiveness of outsourcing is evaluated. And the areas for effective
outsourcing are identified.
The study has shown that MNOs with customer retention as product strategy are likely to be
more concerned with reducing time in their supply chain. However reducing cost appears to be
just as important to everyone. MNOs with different product strategies all view reducing cost as
important strategy for their overall supply chain strategy. The relationship between corporate
strategy and supply chain strategy for MNOs is not as clear as the case for OEMs
The study has shown outsourcing does not guarantee better corporate performance. It is
unclear what the effect is of outsourcing on Profitability, Return on Investment, or Growth in
Market share. Although outsourcing can offload activities to third party domain experts, the
specific areas to outsource and the management of outsourcing can have huge effect on the
final outcome. MNOs need to be careful in choosing which areas are most suitable for them to
outsource and mange these new relationship carefully. For example, information integration
must be done well when activities are outsourced to third party. A well integrated supply chain
will allow the supply chain to be minimized, responsive, adaptive, and efficient. The study has
shown that areas that are more suitable for outsourcing include both forward and reverse
logistics. MNOs should evaluate where their strengths are and should consider outsourcing
logistics activities to third party providers.
7.1
Additional Implications
The implications of the study can be interpreted in different ways. Following the conclusion
that logistics is an area suitable for MNOs to outsource, the perspective of 3 rd party logistic
provider is used to examine additional implications.
As indicated in the study, speed is critical for MNOs that sell handsets primarily for customer
retention. Third party logistic providers need to identify MNOs that focus on customer
retention and assist them in achieving their goals. Third party providers need to identify areas
where value can be added and communicates its benefits clearly. Rather than overtaking the
whole outsourced project, focuses should be on specific areas to demonstrate the most
benefits.
Third party logistic providers need to emphasize its ability to reduce cost for MNOs' reverse
logistic supply. Fast turnaround time may not be the attribute that MNOs are currently looking
for. However as margin continues to squeeze, customers retention and customer satisfaction
will gain importance. Then third party logistic providers will be able to give a competitive
advantage to MNOs by providing fast turnaround time in their reverse logistics.
8. Appendix I: MNO Survey
Demographic Information
1. Which
a.
b.
c.
d.
of the following best describes your job title
President / C-Level Executive
Senior VP/VP
Director/Manager
Other :
2. Your primary area of responsibility is
a.
c.
e.
g.
Procurement
Marketing
Customer Support
Operations
i.
Product Development
b.
d.
f.
h.
j.
Retail Management
IT
Supply chain
Transportation
Other :
3. Your scope of responsibility is
a. Local
b. Country
c. Regional
d. Global
4. If your scope of responsibility is local, country, or regional, please specify the region in
which your responsibility lies
a. Europe
b. Asia Pacific
c. North America
d. South America
e. Middle East
f. Africa
5. Your network is located in (select all that apply)
a. Europe
b. Asia Pacific
c. North America
d. South America
e. Middle East
f. Africa
Mobile Communication Device Strategy
6. Do you sell mobile devices directly to your customers
a. Yes
b. No
7. Do you develop or produce your own branded handsets
a. Yes
b. No
8. Do you subsidize sales of your handsets?
a. Yes
b. No
9. What types of mobile devices do you focus on selling (select all that apply)
a. Ultra Low End (average selling price around $30 USD)
b. Low Cost (average selling price around $50 USD)
c. Enhanced (average selling price around $120 USD)
d. Smartphone (average selling price above $240 USD)
10. What is your purpose in selling handsets
a. Increasing customer retention
b. Increasing revenue with network services, e.g. by upgrading customers to handsets
with higher functionality
c. Generating additional revenue and income from handsets directly
11. Approximately how many different models of mobile phones do you sell directly to your
subscribers?
a.
b.
c.
d.
e.
Less than 10
11-25
26-50
51-75
Over 75
Supply Chain Management Strategies
Please use the following scale to answer each question unless otherwise specified.
3
4
5
Do not
Agree to a
Agree to a
Agree to a
Agree to a
agree
small extent
moderate extent
considerable extent
great extent
12. Reducing cost isthe primary objective of supply chain
management activities
1
2
3
4
5
13. Increasing supply chain flexibility is the primary objective of supply
chain management activities
1
2
3
4
5
14. Increasing supply chain reliability is the primary objective of supply
chain management activities
1
2
3
4
5
15. Reducing time to market isthe primary objective of supply chain
management activities
1
2
3
4
5
16. Reducing order fulfillment lead time isthe primary objective of
supply chain management activities
1
2
3
4
5
Supply Chain Challenges
Please use the following scale to answer each question unless otherwise specified.
1
2
3
4
5
Do not
Agree to a
Agree to a
Agree to a
Agree to a
agree
small extent
moderate extent
considerable extent
great extent
Over the next 5-10 years, major challenges in managing the supply chain will be:
17. An increasing number of mobile communication device and
accessory suppliers
1
2
3
4
5
18. An increasing amount of product variation/customization on
devices
1
2
3
4
5
19. An increasingly global supply chain
1
2
20. Pressure to reduce costs
1
2
21. An increasing amount of uncertainty in demand
1
2
22. Pressure to reduce environmental impact
1
2
Supply Chain Integration
Please use the following scale to answer each question unless otherwise specified.
1
2
3
4
5
Do not
Agree to a
Agree to a
Agree to a
Agree to a
agree
small extent
moderate extent
consi derable extent
great extent
23. Key performance measurements are well known and used
consistently within your organization
1
2
3
4
5
24. Processes are well documented and are consistent within your
1
2
3
4
5
1
2
3
4
5
organization
25. Common data repositories exist for sales, inventory, and forecast
information, and have high visibility within the organization
Supply Chain partners include suppliers, manufacturers, distributors, logistics providers, and
retailers.
26. Point of sales information is shared among supply chain partners
1
2
3
4
5
1
2
3
4
5
1
2
3
4
5
27. Inventory levels are shared among supply chain partners
28. Work in progress levels are shared among supply chain partners
29. Common technologies for data exchange are used between supply
chain partners
30. Sales forecasting is a collaborative process between supply chain
partners
31. Supply chain partners are involved in key decision making activities
32. Goals and incentives are aligned between supply chain partners
33. We provide incentives to mobile device suppliers to share risk (e.g.
payback contracts, advance purchase contracts)
34. Mobile device suppliers provide incentives to us to share risk (e.g.
buyback contracts, rebates)
Distribution and Replenishment
Please use the following scale to answer each question unless otherwise specified.
1
2
3
4
5
Do not
Agree to a
Agree to a
Agree to a
Agree to a
agree
small extent
moderate extent
consi derable extent
great extent
35. We rely on third parties to develop the distribution network
36. We rely on third parties to operate the distribution network
37. Inbound volumes from point of manufacturing are controlled by
our distribution network
38. In our network, mobile devices are distributed from regional (e.g.
North America, Europe) distribution centers directly to the stores
or retailers
1
2
3
4
5
39. In our network, mobile devices are distributed from country
distribution centers directly to the stores or retailers
1
2
3
4
5
40. In our network, mobile devices are distributed from local
distribution centers directly to the stores or retailers
1
2
3
4
5
41. All mobile devices follow the same distribution path, from
suppliers to retailers
1
2
3
4
5
42. Retailers replenishes inventory based on forecasts
43. Retailers replenishes inventory based on point of sales
information
44. Our distribution center replenishes inventory based on forecasts
45. Our distribution center replenishes inventory based on point of
sales information
46. We have ownership of mobile devices during distribution
47. Transshipment strategies are used between your own retail
stores
48. Cross docking strategies are used at distribution centers
1
2
3
4
5
49. Mobile devices are sourced directly from Original Equipment
Manufacturers
1
2
3
4
5
50. Mobile devices are sourced from Distributors / Wholesalers
1
2
3
4
5
51. What share of your mobile devices is sold in your own retail stores?
d) more than half
c) half
b) less than half
a) none
e) all
52. What share of your mobile devices is sold online?
c) half
b) less than half
a) none
d) more than half
e) all
53. What share of your mobile devices is sold in third party retail stores?
d) more than half
c) half
b) less than half
a) none
e) all
54. Do you use different sales channels for different handset types
a. Yes
b. No
Logistics and Transportation
Please use the following scale to answer each question unless otherwise specified.
1
2
3
4
5
Do not
Agree to a
Agree to a
Agree to a
Agree to a
agree
small extent
moderate extent
considerable extent
great extent
55. Third party logistic providers are used
56. Logistics is a source of competitive advantage in your industry
57. A general trend is to use more third party logistics providers
58. If used, third party logistics providers are used primarily to allow
your organization to focus on its core strengths
59. If used, third party logistics providers are used primarily to
increase flexibility of your distribution
1
2
3
4
5
1
2
3
4
5
60. Cost isthe most important criteria in selecting logistic providers
61. Flexibility is the most important criteria in selecting logistic
providers
62. Reliability is the most important criteria in selecting logistic
providers
63. Logistics providers are sourced on central level
64. Logistics providers are sourced on regional level
65. Logistics providers are sourced on country level
Reverse Logistics and Repair
Please use the following scale to answer each question unless otherwise specified.
3
Do not
Agree to a
Agree to a
Agree to a
Agree to a
agree
small extent
moderate extent
considerable extent
great extent
66. Reverse logistics and repair activities are outsourced
1
2
3
4
5
67. Cost is the most important consideration when designing the
reverse logistics supply chain
1
2
3
4
5
68. Turnaround time is the most important consideration when
designing the reverse logistics supply chain
1
2
3
4
5
69. Different return and repair processes are used based on
phone type (Ultra low cost, low cost, enhanced, smart)
1
2
3
4
5
70. Different return and repair processes are used based on
1
2
3
4
5
71. Different return and repair processes are used based on sales
channels
1
2
3
4
5
72. Reverse logistics are designed independently from forward
supply chain logistics
1
2
3
4
5
73. Reverse logistics is gaining importance in supply chain
1
2
3
4
5
1
2
3
4
5
market
planning activities
74. Reverse logistics and repair activities are handled by Network
Operators and not Original Equipment Manufacturers
Competitive Performance
Please use the following scale to answer the following questions
1
Way below average
Slightly below average
Average
4
5
Slightly above average
Way above average
Please compare your performance to the industry average in the following categories:
75. Profitability
1
2
3
76. Growth of profitability
1
2
3
77. Market share
1
2
3
78. Growth of market share
1
2
3
79. Return on Investment
1
2
3
Please provide an estimate of the following quantities:
80. Inventory days of supply (days)
81. Cash-to-cash cycle time (days)
82. Total obsolescence for WIP, and finished goods inventory (%of
revenue)
83. On time delivery performance to requested date (%)
84. Order fulfillment lead time (days)
85. Forecast accuracy (% of sales revenue)
9. Bibilography
AT&T (2009). AT&T 2008 Annual Report.
Cellular News. Top-5 Mobile Phone Vendors Lost Market Share in 2009. (02/2010), CellularNews.com
http://www.cellular-news.com/story/42084.php
Choney, S., Planned obsolescence: cell phone models (2009), MSNBC Technology and Science.
http://www.msnbc.msn.com/id/29258026/
Foxconn(2009). Foxconn 2008 Annual Report.
Halper, M.(2009), Conference: Manufacturing Execs Confess to Demand Forecasting Failure.
Manufacturing Executive, from http://www.manufacturingexecutive.com/news/read/ConferenceManufacturingExecsConfesstoDemandForecastin
gFailure_32682
International Telecommunication Union (2010), Measuring the Information Society
Lee, H. L.(2002, 4 1). Aligning Supply Chain Strategies with Product Uncertainties. California
Management Review, pp. 105-119.
Lee, H. L., & Sasser, M. M. (1995). Product universality and design for supply chain
management. Production Planning & Control , pp. 270-277.
Scanlon, R., (2009). Aligning Product and Supply Chain Strategies in the Mobile Phone Industry.
Massachusetts Institutes of Technology.
Simchi-Levi, D., Kaminsky, P., & Simchi-Levi, E.(2008). Designing and Managing the Supply
Chain. New York: McGraw-Hill.
Zander, M., & Anderson, J. (2008). Breaking up mobile: implications for firm strategy. INFO
Journal , pp. 3-12.